Pharmstandard Considers Sale of OTC Unit After Spinoff

OAO Pharmstandard, Russia’s biggest drugmaker, is looking at attracting a strategic investor to buy its over-the-counter unit, Chairman Viktor Kharitonin said.

Pharmstandard is in no hurry to dispose of the unit and may choose to maintain ownership, Kharitonin said in an interview. Bloomberg News reported June 24 that Moscow-based Pharmstandard was considering selling the OTC business.

“Selling to a strategic investor is one option,” said Kharitonin, 40, declining to name any potential buyers. “But the OTC unit could remain with us for a long time. If it’s sold off to a strategic investor, it’s clear that only a major player will be able to afford such a deal.”

Kharitonin’s comments shed some light on a strategy that confused investors and sent the shares tumbling. Investors were spooked by Pharmstandard’s unexpected plan to pay as much as $630 million to buy a mystery company controlled by a board member, and to spin off the non-prescription drug business.

In the three days following the July 8 announcement, the shares tumbled 45 percent in London and 34 percent in Moscow, while Russia’s benchmark Micex Index gained 1.4 percent. The stock surged as much as 2.7 percent today, trading up 1.3 percent at 1,665 rubles by 10:30 a.m. in Moscow.

The stock sank after Pharmstandard initially refused to identify the owner of the company it plans to buy, Singapore-based Bever Pharmaceutical Pte Ltd., or what the financial benefits would be, and didn’t immediately disclose its plans for the OTC business. Bever is owned by Alexander Shuster, a board member since 2011 who didn’t want publicity, according to Kharitonin.

‘Surprised, Shocked’

“We were very surprised, even shocked; we didn’t expect such a shareholder reaction,” Kharitonin said at a restaurant overlooking the Christ the Savior Cathedral in central Moscow. “We’re giving investors a choice: whoever wants to can participate in both companies, whoever doesn’t can sell their shares in one or both companies.”

Pharmstandard’s Leksredstva unit held 18.7 percent of the company’s stock after the company completed an 8 billion-ruble share buyback last month, while Kharitonin and board member Yegor Kulkov hold 54 percent. The combined stake is just short of a 75 percent threshhold that could trigger a mandatory offer to investors. Delisting Pharmstandard isn’t in the cards, Kharitonin said.

The non-prescription drug unit has the second-biggest market share in Russia, after Novartis AG’s 8.2 percent and followed by Sanofi with 5.1 percent, according to a chart in a Pharmstandard presentation on the spinoff. Johnson & Johnson, the world’s biggest maker of health-care products, had a 2.6 percent share. Pfizer Inc., the world’s biggest drugmaker, isn’t listed on the chart.

Stockholder Votes

Shareholders will vote on the acquisition of Bever at a special meeting on Saturday, Aug. 17. The purchase probably will be completed by the end of the year, and the company will be folded into the OTC business, Kharitonin said.

Pharmstandard plans another shareholder meeting Sept. 27 to vote on the spinoff of the non-prescription unit. The unit will be a separate listed company in the first quarter of 2014, the company has said. “If the OTC business remains a public company, we’ll do everything so that it is valued at the level of its peers in the consumer sector,” Kharitonin said.

A majority vote is needed to approve the Bever purchase, the company said July 10, meaning Kharitonin and Kulkov’s stake would suffice. The spinoff requires approval from 75 percent of shareholders.

Shuster Partnership

Bever, incorporated in May, holds the rights to sell active pharmaceutical ingredients for some of Pharmstandard’s non-prescription medicines.

Pharmstandard never planned to enter the business of active pharmaceutical ingredients because it’s so small in Russia, Kharitonin said, estimating the market at about $200 million.

Pharmstandard’s partnership with Shuster, a “very talented scientist,” began in 2006 when it bought his ZAO Masterlek, which owned the production and marketing rights for antivirals Amiksin and Arbidol, for $146 million, Kharitonin said. Pharmstandard in 2008 bought the rights for Aphobazol, an anti-anxiety medication, for $100 million, after Shuster financed its development.

Bever’s acquisition will probably cost less than the maximum $630 million approved by Pharmstandard’s board, Kharitonin said. Part of the payment may be Pharmstandard shares held by Leksredstva, he said, without elaborating. Shuster doesn’t yet hold Pharmstandard shares, he said.

Profit House

Kharitonin, unlike Shuster, was a late entrant into the pharmaceuticals market. In 1994, the businessman, who has a fortune of $1 billion according to Forbes Russia, created a brokerage named Profit House to buy and sell shares for foreign investors.

The firm also worked for Roman Abramovich, now the owner of Chelsea Football Club, and his business partners, buying stock in aluminum smelters, power companies, carrier OAO Aeroflot and OAO Sibneft, the oil producer now owned by state-run OAO Gazprom, according to Kharitonin.

Pharmstandard was formed in 2003, when Abramovich’s Millhouse LLC and Kharitonin bought Russian assets belonging to ICN Pharmaceuticals for about $55 million. They sold off the pharmacies and real estate, holding onto the factories. Millhouse has since exited, Kharitonin said.

Pharmstandard had little direct competition in the Russian market and didn’t rely on political connections for its quick development including the regulated prescription-drug market, according to Kharitonin.

Technology, Marketing

“In terms of technology and marketing, Pharmstandard was equal to western companies,” Kharitonin said. “Our business at that time didn’t depend on the government. It was purely a business process, we quickly formed a strong management team, invited the best people on the market.”

Pharmstandard held an initial public offering in May 2007, and the company’s London-traded global depositary receipts peaked in February 2011 at $32.30. Since then, they’ve plunged 54 percent, closing yesterday at $14.97. The company has a market value of $2.3 billion.

Kharitonin said he’s spent months without knowing Pharmstandard’s share price, focusing instead on the company’s inner workings. The purchase of Bever will turn out to be a good deal for the company, Kharitonin said, and he has no ulterior motive such as taking Pharmstandard private.

“We want to internalize this value, take away the margin and capitalize in OTC,” Kharitonin said. “Investor concerns that we want to buy out the shares or conduct a hostile delisting are completely baseless.”

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